Real Estate Investing: The First Property

So you have some extra cash and have decided you want to invest in real estate. Before you take the plunge and buy that first investment property you should consider what you hope to accomplish by investing in real estate. Is it to make a quick buck? To save for a future event? Or just diversify your portfolio? Knowing “why” before you buy will help you determine the right type of property at the right price and the amount of cash needed up front.

Long term appreciation: Some investors will buy a rental house because they already have a diversified portfolio or they just aren’t comfortable with stocks and bonds. These real estate investors generally don’t need additional monthly income and they certainly don’t want the ordinary income tax that comes with it. They are looking for the value of their investment to rise for as long as they hold it.

Monthly income: Investing in real estate for monthly income requires one of two things: That you buy at a steep discount or with a large amount of cash. The key here is, if you are going to have a monthly mortgage payment it needs to be low enough to allow you to charge a fair rent for the property and still receive the desired monthly income. Buyers in this scenario should also avoid buying properties that will require a lot of maintenance. It’s one thing to get a good deal but another to have your monthly profits eaten up by repairs.

College for the kids: There are two ways we see clients buy real estate to help with college expenses for their children. The most common is to buy a house, rent it out then sell it about a year before the child starts college. Those investing in real estate for this purpose should have at least five years to hold the property before they need to sell in order to maximize appreciation and minimize the impact of transaction costs.

The second “college” investment strategy is to buy a rental house for your kid to live in while they are in school. The goal here is to avoid paying rent to someone else and hope you see some decent appreciation over the four years (or so) that you hold the house. A potential bonus would be renting out any extra bedrooms to help cover the mortgage or utilities.

Quick profit: Quick is relative when it comes to real estate and profit is anything but guaranteed. Everybody has to start somewhere but unless you have been directly involved in real estate and/or construction we don’t recommend flipping houses as a place to start your real estate investment career.

Quit your day job: This is a great goal to have and we have a number of clients whose “day job” is real estate investing. Just don’t expect that you will be able to quit your job after buying your first investment property.

Being a successful real estate investor involves a plan and a lot of hard work. Before you make the jump into real estate investing make sure you have a clear idea of what you are trying to accomplish. We can help you lay out a plan to make it happen.